Economic Crisis and Global Governance: The Stability of a Globalized World
Miles Kahler
2013
Procedia - Social and Behavioral Sciences
It is difficult to estimate the ultimate effects of an economic crisis that is far from over. Nevertheless, international collaboration during this sharp economic recession has been far more sustained and stable than the course of international cooperation during two previous economic downturns that matched or exceeded its severity: the Great Depression of 1929-33 and the global recession of 1981-82. In both of these earlier cases, economic nationalism grew, and existing modes of cooperation
more »
... her collapsed or were threatened by unilateralism and corrosive forms of regionalism. The persistence global institutions for economic cooperation in the wake of the current economic crisis bears explanation given this history. Among the explanations considered for this departure from previous responses to economic crisis are (a) The character of economic globalization. Although global economic integration may have promoted diffusion of the economic crisis; it may also have shifted the incentives of national governments toward more cooperative responses and rendered economic nationalism and decoupling less attractive. (b) Constraints imposed by international economic cooperation. Contemporary international institutions, following the model of Bretton Woods, have combined international constraints with policies to support national economic expansion: policies of economic stimulus, most notably, have been forged as part of international collaborative bargains, not in opposition to those cooperative modalities. (c) The major developing and transitional economies, which led the way in decoupling from the international economy during the Great Depression and bore the brunt of earlier economic crises, have been able to weather the current economic crisis better than many industrialized countries. Each of these possible explanations for the current record of global economic cooperation also points to a shortcoming in current global economic governance that future reforms must address: (a) A more fully globalized economy means that national policies, particularly those of larger economies, will have a more immediate and potentially negative effect on other economies and their well-being. Closer scrutiny of national policies and new means for exercising such scrutiny will be demanded. (b) Although the current mechanisms of global economic cooperation have allowed considerable flexibility for national policymakers in confronting the crisis, the weakness of international constraints also permitted persistent macroeconomic imbalances and lax regulatory policies that produced the crisis. (c) Award of effective decision-making authority in global governance to key emerging economies, such as China, India, and Brazil, has hardly begun. Given the hard stance in defense of national sovereignty taken by these governments, their growing role has ambiguous implications for future strengthening of global institutions. The ultimate effects of the current global economic crisis are difficult to estimate: not only is the crisis far from over, its impact will be felt long after a global economic recovery is in place. Nevertheless, international collaboration during this sharp economic recession has been more sustained and stable than the course of international cooperation during two previous economic downturns that matched or exceeded its severity: the Great Depression of 1929-33 and the global recession of 1981-82. In both of those earlier cases, economic nationalism grew, and existing modes of cooperation either collapsed or were threatened by unilateralism and corrosive forms of regionalism. In the present crisis, although concrete steps for deepening global economic cooperation have not been agreed, discussion of such measures continues in multilateral settings, such as the recent Group of 20 Summit in Pittsburgh. This apparent stability in economic cooperation may not last, but these initial promising signs merit explanation, particularly when compared with the record of earlier economic crises. One economic cataclysm has shaped our views of global governance for more than a half-century: the Great Depression. The demise of the gold standard, rapid descent into competitive depreciations, beggarthy-neighbor protectionism and trade discrimination, and extensive imposition of controls on cross-border transactions-those features of the post-Depression international system were prominent drivers of institution-building during World War II and in the postwar decades. Vivid memories of the destructive potential of economic nationalism and unilateralism, however, did not produce a template for rapid economic liberalization or tight international constraints on national policies, however. The Bretton Woods order incorporated a new monetary system centered on the International Monetary Fund (IMF), the General Agreement on Tariffs and Trade (GATT), public financing of economic development through the World Bank and other multilateral and bilateral agencies, and longstanding capital controls. The new order was global governance designed for governments that were responsive to the demands of their publics for economic prosperity and security. It did not mark, or even promote, an immediate return to a globalized world. The steep economic recession of the early 1980s, which succeeded two oil shocks and inflation that was unprecedented in the post-1945 era, did not rival the collapse of international economic exchange and international cooperation induced in earlier decades of depression and war. Nevertheless, the early 1980s were a threatening period for the global trading system, as "Fortress Europe" seemed intent on staving off international competition, and the United States embarked on "aggressive unilateralism" during the Reagan Administration. The United States and its allies in free-market orthodoxy (particularly the United Kingdom) were deeply skeptical of international institutional collaboration, even though the International Monetary Fund played a key role in managing the international debt crisis of these years. Japan, at that time aspiring to become "Number 1," did not seem politically interested or economically equipped to play a leading role in strengthening global or regional governance. Economic crisis in the early 1980s ultimately revived many of the instruments of international collaboration, and the world economy emerged from its last, pre-globalization recession without the turn to closure that had marked the Great Depression. Little, if any, lasting innovation in global governance occurred, however, as the world economy entered into an era of wider and deeper economic integration. The current financial and economic crisis has demonstrated that those forces of global economic integration have outstripped the capacities of global governance. A decade ago, predictions of the gradual demise of the nation-state and growing power awarded to supranational institutions were prevalent. Increasing economic integration did not produce either outcome, however. National governance (and
doi:10.1016/j.sbspro.2013.03.062
fatcat:42euxvxluzbc5agndo2c6pdyqe